It should be hard to recall the last time that 70 or more fund managers turned up to hear about a $500 million float.

But just weeks after the brokers on the similarly-sized Virtus Health initial public offering abandoned its boardroom table seating plan and instead opted to squeeze in rows and rows of chairs, the Melbourne offices of broker
Baillieu Holst
were packed tight with investors keen to learn more about
iSelect
, an online business that compares and sells insurance.

Floats are suddenly looking attractive again and even those who aren’t entirely convinced about some aspects of iSelect’s business admit this float will probably shoot the lights out.

It’s not just a question of timing.

iSelect is being pitched by its brokers Baillieu Holst and Credit Suisse as an online business with plenty of growth potential that dominates its category and has a model that has reshaped offshore sectors – with the potential to do so here.

“It’s a new, growing industry in its infancy here in Australia that has experienced rapid growth in recent years," says one fund manager who bought shares in a private capital raising in September. “It’s a structural shift, like home loans 10 years ago. Now 40 per cent of home loans are written by the broker channel and health insurance is going down that path."

The business, co-founded in 2000 by former JBWere private client adviser
Damien Waller
, generates about 80 per cent of its revenue from the health insurance business, although it also compares and sells policies for car insurance, home insurance and energy bills, to name a few.

Each time a new policy is bought, the insurers that are on the company’s panel are paid a fee, either upfront or on a deferred basis, usually called a trailing commission.

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Credit Suisse, one of the company’s advisers, estimates iSelect sold 15 to 20 per cent of all new private health insurance policies in the 2011-12 financial year. Put another way, iSelect wrote more than 100,000 new policies in the same year.

Impressive investors

Ahead of its June sharemarket listing, iSelect’s team and business model – which has been successfully applied in offshore markets including Britain by rivals including Compare The Market, which recently launched locally – has attracted some impressive investors.

mi9
, the joint venture between Microsoft and Nine Entertainment Company, has held a stake that hovered around 30 per cent since 2006, although it will sell its 62 million shares as part of the offer. In selling its stock at $1.85, the company is set to make about five times its initial investment.

Another early shareholder,
Leslie Webb
, will sell 350,000 shares and the company will issue 54 million new shares, which means there is $215 million worth of iSelect stock up for grabs. That still leaves some well-known names on the group’s register. In September, iSelect conducted an off-market capital raising at the same price, attracting institutional investors such as Perpetual Investments, Wilson Asset Management and Independent Asset Management to the register, which also boasts US-based private equity investor Spectrum Equity.

Given that iSelect has done the rounds of institutional investors so recently makes the turnout to its presentations even more surprising (and perhaps a more significant sign that institutional investors are keen to see more IPOs) given that many fund managers are already pretty familiar with the business and its earnings forecasts.

Cynics look at it slightly differently, pointing out iSelect has already secured a strong book of institutional investors, this float will be well supported and difficult to ignore.

Despite the anticipation, there are a few concerns raised by investors, including governance (co-founder Waller is executive chairman). Of greater focus still is the company’s poor cash conversion and policy of booking commissions upfront, even though the structure means they will not be paid in full for a number of years.

Three years ago it received half its commissions as upfront payments and half as trail commissions, where the payment is staggered over an agreed period.

Commissions up front

For the 2013 calendar year the company expects that more than 61 per cent of commissions will be up front and it hopes it could be greater if it is successful in flipping one major health provider’s payment terms.

Another point of interest for investors when they look at the company’s earnings forecast is the group’s treatment of a three-year $75 million facility to start-up insurance provider NIA or
health.com.au
, which is backed by the Fraid family, who started the Spotlight retail chain. Under the terms of the loan, iSelect will only collect commissions from health.com.au (the first health insurer to have set up in more than 10 years) at the end of the loan.

During last week’s briefings the company told investors it expects to generate earnings before interest, tax,depreciation and amortisation (EBITDA) of $26 million, compared with last year’s earnings of $24 million.

The company attributes the flattish growth to the 2012 budget decision to means test the rebate for private health insurance, arguing the policy brought forward a number of sales and caused a slight spike in earnings for 2012. But whatever concerns there might be about parts of the business, no one’s arguing about the group’s market share or its ability to convert sales. Instead, it’s prompting a debate about how iSelect and its competitors could reshape the health insurance industry.

iSelect says it has about 3.5 million leads a year and has consistently improved its conversion rates with its model of using both the internet as well as call-centre staff. It’s the call-centre model that slightly differentiates iSelect from its competitors – and a difference the company says means it sells more products, although some investors note that it makes it more expensive to grow than a pure tech business.

In 2010, the company was converting 3.6 per cent of the site visits, while this year it estimates it will be closer to 6.3 per cent. The company and its rivals are making enough of a dent in the insurance market to upset majors Medibank Private and
Bupa Australia
, which together write just under 60 per cent of premiums by revenue.

Aggregators’ role

Neither sell products through iSelect, although
Medibank Private
does sell its low-cost AHM brand through the channel. And both have publicly called for greater transparency around aggregators’ commission structure. Medibank has said in the past that aggregators would add to premium costs and questioned their impact on the market.

“Aggregators have certainly contributed to ‘churn’ in the industry. They have generated an emphasis on price at the expense of consideration of value," Medibank Private spokeswoman Sarah Chibnall says. “Aggregators have a role to play, particularly in market segments which focus on cost and convenience."

Churn rates have increased, with some estimating that between 9 per cent and 9.5 per cent of customers are lost each year through churn. Five years ago, that range was between 7 per cent and 7.5 per cent. However, others say that can be explained by more customer awareness that has been fuelled by a greater advertising spend.

According to ACNielsen, advertising spend in the insurance industry has increased $90 million since 2007 to $140 million. In 2012, iSelect was estimated to have outlaid about $20 million in advertising fees, less than Bupa and Medibank Private. Bupa, which has recently settled a legal dispute with iSelect, was not available to comment.

Not all insurers see these sites as the enemy.
Mark Fitzgibbon
, chief executive of nib holdings, doesn’t agree that companies that compare prices online have shaken up the industry, arguing instead they are beneficiaries of broader growth in the insurance sector and a helpful addition to the industry.

“I think they’ve been good for the industry as they’ve hung another shingle out and driven volume. They don’t on their own explain the impressive growth in the industry, they’ve certainly been part of that story," Fitzgibbon says.

“I think anything that shakes up competition and benefits consumers is good. The risks that are associated [with online price comparison companies] that we’ve seen in other markets, is the aggregators become so powerful they can dictate terms and conditions. I think that’s a very low risk. We still rely heavily on our own organic efforts and we’ve done tremendously."

He dismisses calls for commission transparency, arguing sites like iSelect are another form of marketing for insurers. “In the end, certainly the commissions are an issue for us to manage and we absorb the commission as part of any acquisition cost . . . when we sell a policy over the phone, we don’t tell customers how much advertising costs."